The first cut is the deepest?

October 4, 2016

An analysis of the impact base rate cuts have on funding for small businesses

Ever since the Brexit vote the UK economy has been navigating uncharted waters. In August the Bank of England made to the decision to cut its base rate from 0.5% to a new historic low of 0.25%. This has affected borrowing and investment for both domestic and business customers. FSB national chairman Mike Cherry argued that the decision will be highly beneficial to many of the nation's smaller businesses, coming at a time when confidence among this group has fallen to a four-year low.

"This is the first time interest rates have been cut for seven years and brings rates to a new historic low," the FSB chief noted.

In this article we look at 5 effects of the base rate cut on funding for small businesses.

In theory the base rate cut should mean cheaper borrowing for businesses. However, banks and other financial institutions seem to be taking their time in passing on the reduced interest rates to borrowers both current and potential.

The base rate cut has not yet led to an increase in demand for small business loans. Perhaps this is due to uncertainty about the UK’s economic future, or it may be a case of waiting for a better deal.

There have been concerns that if the Bank of England were to declare a negative base rate, some banks may impose charges on credit balances in order to maintain their profit margins. So when looking at different bank offerings it would be worth finding a bank that commits not to impose charges.

Following on from the above, some banks are gradually withdrawing their best value savings accounts from the market as another way of maintaining their profit margins. This means that those with credit balances are receiving lower rates of interest on them.

The base rate cut caused an immediate plunge in the value of the pound against other major currencies. At the same time London’s FTSE 100 had its best day for several weeks. Whilst both these areas fluctuate from day to day, such wider impacts of the base rate cut must not be underestimated.

Overall, there have been both pros and cons of the base rate cut, both on funding for small businesses and on the wider economy. But the potential of a slowdown in economic growth are of great concern to many small businesses, and the impact of the base rate cut needs to continue to be closely monitored by both the government and the Bank of England. Both institutions need to ensure that they are doing all they can to stabilise the economy and support its growth in the months and years ahead.

At Fair Business Loans we are passionate about boosting the economy by supporting the growth of small businesses. We need every ounce of talent that is out there, and need to empower those with that talent to be able to realise their full potential and help both their own business - and the economy as a whole - move forward. If you are looking for funding for your small business in these turbulent times then why not get in touch with us and see how we may be able to help?